Should I make voluntary National Insurance contributions?

Q. I am about a year away from receiving my state pension. I retired early, so am three years short of National Insurance (NI) contributions to qualify for the full state pension. It will cost me around £2,700 to make up for those three years of missed contributions. Is it worth doing? I am concerned about handing money over to the government in case they make further changes to the state pension, making the decision uneconomical.

A. Many people are worried about the long-term sustainability of the UK state pension. It is possible that the government could, over time, raise the age at which people can claim it, reduce the generosity of the triple lock, or even introduce means-testing - similar to the system used in Australia. That final option would represent a major shift in policy.

For younger workers, this uncertainty may justify delaying voluntary NI contributions until they are closer to retirement and have more clarity about what they will receive and when.

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However, you are only one year away from state pension age. It would be highly unlikely - arguably unprecedented - for the government to make changes that affect people so close to receiving their pension, given how central this income is to retirement planning.

Historically, large changes to the state pension age in the UK have been announced many years (usually decades) before they take effect.

For example, the decision to equalise state pension ages for men and women was made in 1995. Changes were phased in gradually between 2010 and 2020 - giving people 15 to 25 years’ notice.

Admittedly, there was major upset in 2011, when the timeline for increasing state pension ages was accelerated, impacting women in their late 50s and early 60s in particular. However, this was highly controversial, and the enormous media backlash and ongoing legal battle makes it unlikely the government would repeat such a rapid change for those so close to retirement.

So, let’s assume that, in all likelihood, the state pension will be there for you in some form.

Making up those three years of NI contributions will boost your state pension payment by around £840 per year. Given the cost to you is roughly £2,700, you could make your money back in a little over three years (not taking tax into account).

Even factoring in 20% tax, you’d likely make the money back in around four years.

To put it another way: by not making up those payments, you would miss out on £840 per year for the rest of your life.

Those calculations don’t even account for the growth provided by the triple lock. This is a guarantee from the government that it will increase the state pension each year by inflation, average wage growth, or 2.5% (whichever is highest) and it has boosted pensioner incomes significantly.

Even if the state pension only rose by 2.5% per year, after four years the amount you’d be missing out on would have grown from £840 to approximately £905. After 20 years of 2.5% increases, you’d be forgoing roughly £1,340 per year. Over those 20 years, you’d have missed out on more than £21,000 of state pension payments - although that could be significantly higher if either wage growth or inflation is greater than 2.5% in any of those years.

Of course, the triple lock could disappear in future. But even without it you will still miss out on significant sums over the years.

The longer you live, the more you’ll lose out on by not making up those payments. After all, you have worked and diligently paid your NI contributions for 32 years, spending a little extra to secure the full state pension is likely to be a sound choice.

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Important information: investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.